Issues Covered in this Section
- IRC §6050W, Information Reporting of Payments Made in Settlement of Payment Card and Third Party Network Transactions
- Use of Logos on Substitute Information Returns and Payee and Wage Statements
- Claim for Refund of Over-Withholding by Foreign Persons Investing Through a Qualified Intermediary
- Comments on Internal Revenue Manual on Form 1042 Examinations
- Missing or Incorrect Taxpayer Identification Numbers on Forms 1099-MISC, Miscellaneous Income
- Build America Bonds
- Widely Held Fixed Investment Trusts
In response to the IRS list of questions in Notice 2009-19, Reporting of Payments Made in Settlement of Payment Card and Third Party Network Transactions, IRPAC made the following recommendations:
- IRS should create a new form to minimize confusion with other, overlapping reporting provisions.
- IRS should generally adopt the existing practices for most other information returns in areas of, e.g., substitute forms, use of the Filing Information Returns Electronically (FIRE) system, etc., and to add IRC §6050W to the group of reporting provisions listed in Treas. Reg. 31.3406(d)-1(d), which specifies the method for providing a non-certified Taxpayer Identification Number (TIN).
- IRS should undertake an education campaign for the Payment Settlement Entity/Electronic Payment Facilitator (PSE/EPF) communities.
- IRS should allow electronic payee statements with modifications to the consent rules in recognition of the electronic nature of the business.
- For electronic payments to merchants doing business within the United States, the term PSE should include all entities that otherwise meet the definition without regard to their country of residence. In addition, the basic rules regarding middlemen set forth in Treas. Reg. 1. 6041-1(e) should be applied here when defining who qualifies as an EPF.
- Any merchant with a U.S. address on record with the PSE/EPF should be considered a participating payee, and any merchant with only a non-U.S. address on file with the PSE/EPF should qualify for the foreign address exception without additional documentation, absent actual knowledge of a U.S. presence on the part of the PSE/EPF.
- IRS should define “United States” as not including U.S. territories.
- IRS should use the existing regulatory definition of payment card.
- The regulations should not include health care or accounts payable networks in the definition of third party payment networks.
- IRS should provide that the amount to be reported is the amount paid or credited to the merchant.
- IRS should provide in the regulations that any transaction reported under IRC §6050W will be exempt from reporting and withholding under all other Code sections, since reporting under IRC §6050W will ensure the broadest coverage without any duplication, thereby both providing IRS with the most expansive pool of information without confusing taxpayers with multiple reports of some transactions.
- IRS should clarify the interrelationship between the health care exemption under IRC §6041 and the broader rules under IRC §6050W.
- The same cash/calendar rules used under other reporting sections should apply for IRC §6050W purposes, and, if IRS desires to have line item correlation, the specific tax returns should be revised to provide for a line that reflects the amount reported under this section.
- IRS should apply the same record retention and TIN matching rules as are applicable elsewhere in the Code.
All of the recommendations are designed to provide IRS with the information called for under the statute without over-burdening the payer communities. IRS benefits by receiving the best information available without distortions caused by duplicate reporting; it also avoids unnecessary audits caused by duplication. Taxpayers benefit since they avoid receiving confusing duplicative reports that may lead to tax return errors, and they avoid having to deal with IRS inquiries resulting from such duplication and errors. The payment card community benefits by minimizing the burdens it must shoulder while still providing the required information. Existing rules are used as much as possible thereby avoiding unnecessary attempts to “reinvent the wheel.”
IRPAC met with Counsel on these IRC §6050W issues in April 2009. In addition, IRPAC responded to an e-mail inquiry from Counsel in May 2009. At this writing, IRPAC is awaiting release of proposed regulations.
IRPAC recommended that the IRS postpone the general prohibition against logos including slogans, advertising and logos on substitute information returns, payee statements and employee wage statements reporting amounts paid during the 2010 calendar year set forth in Revenue Procedure 2008-36 and Revenue Procedure 2008-33. IRPAC further recommended that the use of certain logos should not be prohibited and that the IRS should issue guidance regarding limited exceptions to the general prohibition to be made effective in future years. In addition, Volunteer Income Tax Assistance (VITA) volunteers should be trained to recognize various types of substitute tax information returns that are commonly used.
IRPAC met with Chief Counsel in January, March, and April to discuss concerns with the general prohibition against the use of slogans, advertising and logos on information returns, payee statements and employee wage statements set forth in Revenue Procedure 2008-36 and Revenue Procedure 2008-33. Counsel provided background regarding the following concerns related to the use of slogans, advertising and logos in this context:
- Counsel was aware of situations where advertising flyers were included in envelopes with wage statements.
- VITA volunteers had reported that taxpayers were confused by payee statements containing logos and slogans, and often disposed of such statements believing them to be advertisements.
Following further discussion, IRPAC agreed that advertising is not appropriate on information returns, payee statements and employee wage statements, but expressed concern that a complete ban on the use of logos and slogans in this context would only increase taxpayer confusion for the following reasons:
- Logos are a key identifier for the taxpayer and are often part of the legal name of the issuer.
- Financial account holders are accustomed to seeing the logo of their financial institution on all correspondence regarding their accounts, and may dismiss forms lacking such logo as fraudulent.
- Employees are also accustomed to seeing the logo of their employer or their employer’s payroll processor on their checks, check stubs and Forms W-2, and may dismiss forms lacking such a logo as fraudulent.
In addition, distinctions were drawn between advertising and logos and a lengthy discussion took place regarding the difficulty of distinguishing between logos and slogans. IRPAC also referred to its 1996 memorandum on the use of logos and provided comments on the issue from industry leaders.
Counsel and Tax Forms and Publications shared with IRPAC members proposed language regarding advertising and logos, which will be included in the next revision of Publication 1141, General Rules and Specifications for Substitute Forms W-2 and W-3 and Publication 1179, General Rules and Specifications For Substitute Forms 1096, 1098, 1099, 5498, W-2G and 1042-S. Counsel and Tax Forms and Publications met with IRPAC members regarding the proposed language and requested their comments. Counsel and Tax Forms and Publications agreed to postpone the general prohibition against including slogans, advertising and logos on substitute information returns, payee statements and employee wage statements reporting amounts paid during the 2010 calendar year set forth in Revenue Procedure 2008-36 and Revenue Procedure 2008-33.
IRPAC recommends that guidance be published, whether via an IRS notice or through the forms and instructions, that will allow a foreign direct account holder of a Qualified Intermediary (QI) to substantiate the amount of tax withheld by the QI and reported on a pooled basis by providing alternative documentation in lieu of a Form 1042-S, Foreign Person's U.S. Source Income Subject to Withholding, issued in their name.
In the alternative, IRPAC suggests that the IRS create an informational form that may be provided by a QI to foreign direct account holders who desire to file a claim for refund with the IRS. One suggestion is for the IRS to create an informational form that contains the gross amount of the payment and the amount of the taxes withheld. The informational form would allow the foreign direct account holder to substantiate the amount of the withholding and the QI would not be required to amend their Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons.
An undocumented foreign account holder investing through a QI is subject to withholding at rate of 30 percent. Despite failing to provide the QI with documentation to prevent non-resident alien (NRA) withholding, the foreign account holder's U.S. source income may be subject to a lower rate of U.S. tax pursuant to an income tax treaty or a provision of the Internal Revenue Code.
While a foreign account holder may request their QI to provide a refund for amounts over-withheld through the collective refund procedure (Section 9.03 of the QI Agreement) or the reimbursement/set-off procedures (Sections 9.01(A) and (B) of the QI Agreement), the QI is not obligated to comply with the refund request. If the QI does not apply the referenced refund procedures, the only option available to a foreign account holder who desires to obtain the amounts over-withheld is to file a claim for refund with the IRS.
To obtain a withholding tax refund or credit from the IRS, taxpayers must be able to substantiate that the withholding occurred. The only documentation the IRS Service Center will accept to prove the amount of the withholding is a Form 1042-S issued in the name of foreign account holder. The IRS does not accept any documentation (e.g., bank deposit statement, etc.) other than Forms 1042-S from taxpayers to substantiate the amount of the NRA withholding and have been denying taxpayers' (i.e., the foreign account holders’) requests for refunds.
Under the QI Agreement, a QI is permitted to report payments made to its direct foreign account holders on a pooled basis rather than reporting payments to each direct account holder specifically. Generally, most QIs file Forms 1042-S on a pooled basis (i.e., a single Form 1042-S for each type of income per rate of withholding (Box 2, Gross Income and Box 5, Tax Rate, respectively)). Additionally, Section 8.01 of the QI Agreement provides that the QI is not required to file separate Forms 1042-S for direct foreign account holders who are subject to pooled reporting, even if requested by their account holder. Many QIs have chosen not to provide separate Forms 1042-S (even upon request) to direct account holders whose payments were included on a pooled Form 1042-S because of the requirement to make corresponding amendments to the Form 1042.
In January 2009, IRPAC met with the IRS to discuss this issue. The IRS representatives indicated they appreciated the suggestion and were willing to create a mechanism that will allow foreign account holders investing through a QI to substantiate the amount of NRA withholding for purposes of claiming a refund from the IRS. The IRS representatives were unclear of the mechanism that would be best to address this situation.
When the IRS revises Internal Revenue Manual (IRM) 4.10.21 (Form 1042 Examinations) IRPAC suggests the IRS consider the suggested revisions discussed with the U.S. Withholding Agent Team in August 2008.
In August 2008, IRS published a revised version of the section of the IRM relating to U.S. Withholding Agent Examinations. Below is a summary of IRPAC’s observations on the IRM, which were discussed with the IRS. A complete outline of IRPAC’s observations is included in Appendix A.
1. Withholding Tax Issues as a Tier I Issue
With withholding tax being elevated to a Tier 1 issue in December 2008, IRS examiners are required to examine withholding matters during every examination, and to coordinate the audit and their findings with the issue owner executive and issue management team.
IRPAC suggested that the IRM provide that the examination manager has discretion in each case to consider certain predetermined factors (e.g., type of business, industry, internal controls, etc.) with respect to each taxpayer, and, if appropriate, perform a spot check to determine if a full-scope withholding tax exam is required.
2. Comparison of Forms 5471 and 5472 to Forms 1042 and 1042-S
Section 18.104.22.168.6 of the IRM requires IRS examination agents to compare payments reported on Form 5471, Information Return of United States Persons with Respect to Certain Foreign Corporations, and Form 5472, Information Return of a 25% Foreign-Owned Corporation, to payments reported by the taxpayer on Forms 1042 and 1042-S.
IRPAC suggested that the IRM should include a note indicating that the amounts reported on Forms 5471 and 5472 will not match the amounts reported on Forms 1042 and 1042-S because of the difference in accounting methods. Forms 5471 and 5472 are filed on the accrual basis and Forms 1042 and 1042-S are filed on the cash disbursements basis.
3. Payments for Personal Services – Contemporaneous Documentation
Generally, personal services are sourced at the location where the services are performed. The burden of proof of non-U.S. source is on the withholding agent. IRM 22.214.171.124.4 provides the following factors that the IRS examiner should consider in determining where the personal services were performed: contemporaneous records, travel expenses, vendor contracts, and interviews with the approver of the expense or contract.
IRPAC suggested that it be noted that the list of factors set forth in IRM 126.96.36.199.4 is a nonexclusive list, and that the withholding agent can apply a reasonably prudent business person standard to determine where the services were performed. IRPAC also suggested that the IRS delete the statement related to the reliability of the foreign vendor's statement about where the services were performed.
4. Validation Process of Forms W-8
IRM 188.8.131.52.4.3 sets forth the steps an examiner should take to determine the validity of Forms W-8.
IRPAC suggested that IRM 184.108.40.206.4.3 be modified to clarify that each section is severable. For example, a Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding, with an invalid tax treaty claim should still be valid to document the beneficial owner's status as foreign (assuming the remainder of the form is otherwise valid).
At the conclusion of the August 2008 meeting, the U.S. Withholding Agent Team indicated they understood the need for clarifying certain items in the IRM and stated they would take IRPAC’s observations under advisement.
In response to IRS concerns regarding a relatively large number of Forms 1099-MISC that are filed with incorrect or missing payee TINs, IRPAC recommended that the IRS consider:
- Providing more guidance to sole proprietors and/or other service provider payees on how to provide accurate legal name/TIN information by telephone or in writing. The IRS could consider providing such targeted guidance in the form of FAQs on IRS.gov;
- Establishing a program to educate practitioners and the accounting community that advises small business owners/payers regarding the collection of TINs from payees and the associated Form 1099-MISC filing requirements; and
- Working with small business software providers to enhance their software so it will assist business owners with obtaining proper names and TINs from service provider payees.
After Forms 1099 have been filed with the Service, IRS compares the name/TIN combinations reported by payers on six types of Forms 1099 (i.e., Forms 1099-B, DIV, INT, MISC, OID, and PATR) with those on the IRS systems. If the IRS determines a payer issued one of these types of Forms 1099 with incorrect TINs, the IRS sends a CP 2100 letter to the payer notifying them of the accounts with name/TIN mismatches. When sending the CP 2100. IRS also includes a list of Forms 1099 that were filed with no TIN; though not a part of the "B" Notice program, this supplemental listing serves to remind payers of the need to be backup withholding on those accounts. Subsequent to the issuance of the CP 2100 letter (about 11 months later), the IRS will also generally send the payer a Proposed Penalty Notice 972CG assessing a penalty for each occurrence of a name/TIN mismatch or missing TIN (as well as other filing failures such as for late filing). This penalty may be waived if the payer can show it took the appropriate actions to meet the requirements of reasonable cause including the IRS solicitation requirements as set forth in the Treasury Regulations.
IRS has determined, through data on Forms 1099-MISC, that there are approximately two million payees that have incorrect or missing TINs. IRS sent CP 2100 letters to payers regarding most of these incorrect or missing TINs, and also sent approximately fifty to sixty-five thousand proposed penalty notices. Nevertheless, the level of compliance remains much lower than the IRS believes it should be.
IRS advised that it is concerned with both timely and accurate Form 1099-MISC reporting as well as backup withholding compliance. Further, the problem seems to stem from smaller business payers that do not have back office staffs and have a small number of payees.
Focusing only on Forms 1099-MISC issued without TINs, IRS has audited a small number (approximately 100) of those payers from varying industries to ascertain why compliance with obtaining TINs has been an issue. In some cases, the IRS assessed backup withholding against the payers.
IRS, however, does not have the resources to resolve the missing TIN compliance issue solely through the audit process. IRS has considered issuing “soft notices” for the missing TIN accounts but does not believe such letters would add much value since CP 2100 letters are often disregarded by payers.
Members of the Small Business Self-Employed (SBSE) division ors IRS met with IRPAC in April 2009 to request guidance on how to otherwise address the issue. During the meeting, IRPAC noted the following:
- The likelihood of a missing or incorrect TIN on a Form 1099-MISC is probably much greater than on other types of Forms 1099. First, the other Forms 1099, such as a Form 1099-INT or DIV, are generally issued by larger institutions to repeat investment clients, whereas a Form 1099-MISC could be a one-time issuance by a "mom and pop" entity for the performance of services. Smaller entities are less likely to be knowledgeable about TINs and filing rules. Further, many service providers are sole proprietors doing business under a business name but filing returns with the IRS under his/her legal name and using his/her social security number (SSN) as their TIN. The individual may provide the payer with his/her SSN and the name of his/her sole proprietorship business instead of his/her legal name, unintentionally creating a name/TIN mismatch.
- Most accounts payable systems are not designed to track backup withholding.
- As noted above, payers are not obligated to collect certified TINs on Forms W-9, Request for Taxpayer Identification Number and Certificate, from service provider payees. However, some payers do collect the forms as part of their standard practice. Members of IRPAC have observed that the current version of the Form W-9 is troublesome for some payees to properly complete. For instance, the instructions are not clear on how a single member Limited Liability Company (LLC) should complete the form. This difficulty may result in unintentional name/TIN mismatches. IRPAC has previously provided recommendations to the IRS regarding changes to the Form W-9 and related instructions.
F. Build America Bonds
IRPAC recommended that the IRS facilitate the flow of information between state and municipal issuers of Build America Bonds (BABs) and nominees by publishing essential information to IRS.gov. IRPAC requested that the information include, at a minimum, the classification of the bond, Committee of Uniform Security Identification Procedures (CUSIP) numbers, a description of the bond (including the name of the issuer and contact information of the issuer), and also specify whether the issuer would receive direct payment from the federal government as a subsidy or if the bondholder would receive a tax credit.
IRPAC met with Chief Counsel and members of the Tax Exempt and Government Entities (TEGE) operating division via conference call in June, 2009 to discuss BABs, which were authorized in the American Recovery & Reinvestment Act of 2009 (ARRA). Of particular concern is the bond offering federal tax credits in addition to the coupon interest normally received by investors.
IRPAC stated that BABs bore resemblance to Clean Renewable Energy Bonds and Gulf Tax Credit Bonds in that they posed potential identification challenges, which were discussed in IRPAC’s 2007 Public Report. The BAB program allows municipal issuers to sell an unlimited amount of taxable debt in 2009 and 2010. A potential complication is the ability to strip or separate the tax credits from the interest payments. Such stripping activity would create additional securities for which reporting is required.
In IRPAC’s 2007 Public Report, IRS noted that it cannot release bond information such as CUSIP numbers and issuer names without the consent of the issuer. At that time, IRS was considering asking issuers to voluntarily authorize a release of bond information when filing Form 8038, Information Return for Tax-Exempt Private Activity Bond Issues. Further, adding a disclosure release was not then discussed with Counsel and another Form 8038 specifically for tax credit bonds was under consideration.
In June 2009, IRPAC noted that the current Form 8038 does not have a disclosure checkbox. Counsel replied that a revised Form 8038 will include lines for positive consent to publish CUSIP numbers. The form is scheduled for release in January 2010. IRPAC noted that negative consent would be preferable. Although the IRS agreed that negative consent would be more effective, they felt unable to proceed with that format and will provide for positive consent on the form. IRS noted that tracing this information is important to improve taxpayer compliance and that a bondholder unit was developed last year to simplify the process to this end.
IRPAC believes the addition of a disclosure consent checkbox to Form 8038 will improve the flow of information from issuers of BABs to nominees. Consequently, nominees will be able to provide more accurate information returns to the IRS and taxpayers. Taxpayers would receive timely and accurate information in order to prepare their income tax returns. The IRS would overall receive more accurate and complete returns.
IRPAC recommends that IRS provide additional penalty relief and allow for continued deferral of Widely Held Fixed Investment Trusts (WHFIT) reporting to allow brokers additional time to work out the delivery side of WHFIT statements, the need to determine whether reportable information should be on Forms 1099-Composite or on the WHFIT statement and a need to educate the tax return preparer community about what to do with WHFIT statements.
WHFIT reporting rules were published on January 24, 2006 in the Federal Register (T.D. 9241, 2006-7 I.R.B. 427 [71 FR 4002]) under §1.671-5. IRPAC and IRS have had annual discussions on WHFITs. IRPAC, in its 2006 Public Report, recommended that IRS publish a complete list of issues as a directory on IRS.gov to help ensure complete reporting. This recommendation endorsed the 2002 IRPAC suggestions and was again requested during a meeting in 2007.
In 2008, IRPAC met with IRS representatives to describe the current state of progress toward compliance in WHFIT reporting. At that time, much work remained for trustees to generate the required data, which would be delivered to intermediary service providers who would calculate, organize and format data for brokers. It was apparent that only a small segment of the WHFIT universe could be reported on under the new regulations for 2008. Accordingly, IRPAC asked for continued penalty relief for 2008.
IRPAC met with IRS representatives in August 2009 to discuss the current state of the industry's capability to comply with WHFIT reporting rules. IRPAC noted that progress was being made primarily by the intermediaries who process information from the trustees and provide the results to brokers. IRPAC noted, however, that progress has been slow because the intermediaries have been working through data quality issues residing in mortgage-backed trusts.
The IRS is currently working to address issues, which were raised previously, but, as the industry has worked to implement the requirements, additional issues have been raised. Such issues include:
- To produce a compliant WHFIT statement for investors, brokers (most of whom deal with intermediaries) need to see sample WHFIT statements that meet the requirements set forth in the Treasury Regulations so they can work with print vendors in creating their WHFIT statements.
- 2. Some financial industry members are divided as to whether traditional reportable data (e.g. interest on Form 1099-INT) should be included on the WHFIT statement or continue to be separately reported.
- The financial services industry urges IRS to expand its communications efforts (e.g. forms instructions) with the tax preparer industry, including software vendors to minimize confusion and improve efficiency.
- IRPAC also urges the IRS to increase its educational outreach efforts with taxpayers who may be confused when they receive their normal Form 1099-Composite statement in February, and then supplemental WHFIT data in March. This confusion will likely cause an unnecessary increase in amended returns to be filed.
- Because of the complexity of WHFIT reporting, many retirees invested in mortgage backed bond trusts may find they incur higher tax preparation fees. Increased educational efforts will help these older investors understand why they may face additional charges to sort out their complex tax situation.
IRPAC believes that these issues are significant and it is prudent for IRS to consider deferring required compliance and providing additional penalty relief for WHFIT reporting for the 2009 reporting year. The delay would benefit payers by allowing them to become better prepared to deliver uniform and accurate tax forms and statements. Taxpayers would avoid potentially more expensive tax return preparation fees and reduced number of amended returns. IRS would benefit from additional time to consider a communication/education effort toward the tax preparer industry, which would result in receiving more accurate tax returns and fewer amended returns to process in the future.